May 4, 2020

A guide to selling a dental practice

Selling something you’ve spent your entire career building is hard. We won’t trivialize that, but we will equip you with the information you need to be prepared. 

The goal of this post is to walk you through how your agent (your broker probably) will approach this process. 

Distribution

Getting in front of buyers is one of the hardest parts of the process. Brokers spend a lot of time building relationships with buyers so that when your practice is ready to sell, they have 20-30 buyers they think would be ideal to carry on your legacy. 

The other expert advisors in the dental community, CPAs, lawyers, bankers, consultants, are key sources of information about who might be selling. 

Additionally, local and regional trade periodicals like The Dental Trader or those published by the ADA or the California ADA dedicate significant space to ads for practice sales.

Some other places with high concentrations of buyers are dental school alumni job boards, conferences, continuing education seminars, and search ads on Google, Bing, Yahoo, and Facebook.

Who are the buyers 

Buyers come from different backgrounds, experiences, and with different intentions. When we think about groups of buyers we see four general categories that you’ll encounter

1/ Associates with some experience looking to transition into ownership

2/ Dental graduates looking to bypass an associateship and move right into ownership

3/ Other owners looking to expand or grow

4/ DSOs

Valuation

There are many “rules of thumb” for the valuation of dental practices. These rules are a good place to start but the details of your business will shape the actual value of your practice. Be sober about evaluating your business and recognize that a buyer will value parts of your business differently. Consider working with a CPA or a professional appraiser who can evaluate your financial and operational situation to generate a more accurate valuation. You can read more about valuations here

Overhead, personnel, collections, insurance, and procedures

Overhead directly affects the amount of money you take home each week. Controlling overhead, without impacting patient experience and care, is an enormous lever to improving the quality of your business. Staff wages and laboratory expenses are almost certainly your two biggest areas of overhead. They are also related to production. Be thoughtful and methodical about how you make tradeoffs between the two. Read more here about managing overhead.

Another key input into your valuation is the type of dentistry you are performing in your practice. Are you doing lots of implants, or do you specialize in emergency procedures? These choices influence the total production of your practice and if the buyer doesn’t have experience in these areas will influence their ability to match production in the early years of the transition.

Your collection rate and timeliness will also influence your valuation. Especially as it relates to the number and types of insurances you accept. While it may seem counterintuitive new doctors prefer practices that accept fewer insurance plans. Having fewer insurance providers makes it easier to negotiate reimbursement rates and avoid patient churn related to insurance coverage.

Also, consider any circumstances that might be unique to you. Do you have a long-term personal relationship with the building owner that has resulted in a well-below market lease? If the buyer will pay a higher market rent that will change what the practice is actually worth. Are you a Delta Dental Premium practice? If the buyer won’t have access to preferred billing rates that impacts the revenue they can generate on day 1. 

One final note, a practice is worth what someone will pay. Think of all the stories you’ve heard about the absurd realities of the San Francisco Bay Area real estate market. Buyers offering thousands above asking, in cash, as-is, with a 14-day escrow. This situation exists because demand in this area is intense. Work with your agent to drive as much demand as you can.

Creative accounting

Take the time to talk with your accountant to understand opportunities to maximize your tax incentives on your proceeds from the sale. I’ve talked with plenty of buyers who are open to structuring deals in ways that help minimize the effective tax rate applied to the sale. 

Without getting into the details, there are effective measures you can take to optimize how much you bring home from your deal. Your CPA or attorney can help you evaluate these options and understand the implications now and for your future income. 

Speed, Price, Fit - choose 2.

Once your practice is listed you’ll talk to many prospective buyers. Know that you’ll necessarily trade-off between speed, price, and fit. If you have a very specific perspective on the type of doctor you’d like to replace you and how much you expect to receive for the practice expect to wait longer to find those things. Alternatively, if you are looking to move quickly but still maintain a narrow price target, chances are you’ll have to give up on some of the ideal characteristics of the dentist who replaces you. 

Closing and Transitioning

The final steps of closing the transaction and transitioning to the new owner are highly contingent on the details of the transaction. As with everything know what is important to you. If you don’t want to work after the sale, be explicit as you are engaging with dentists pre-LOI. But also be open to how things might change as the transaction unfolds. I talked with a dentist who felt certain he didn’t want to work after the transition but ultimately decided to continue practicing for over a year after the transition. Things change, be honest with yourself.

There is a lot that goes into selling your practice. The more you prepare, before you’re ready to sell, the more you’ll be able to realize your goals. Hiring effective representation is invaluable. Find someone who shares your goals and don’t be afraid to switch if you don’t feel like it’s a good match.

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